Typically ranging between 300 to 850, your credit score is a calculation of how likely you are to repay loans and pay bills. Companies who calculate these scores feed information from your credit reports into mathematical formulas to come up with the credit scores.
What does your credit score mean?
Having a low credit score doesn’t mean that your application for credit won’t be approved. It just means that lenders may charge you a higher interest rate or ask you to provide personal assets as collateral. Some landlords also use credit score as a parameter to decide whether they want to rent their property to you.
A higher credit score is always better. It can give you access to more credit products at lower interest rates. People with a credit score of 750 and above have many options, including 0% financing on cars and credit cards with 0% opening interest rates.
While checking your credit, lenders or card providers may be examining your credit report, credit score or both. If you are curious about what they are seeing, you can decide to check your credit score yourself.
Credit score ranges
Scoring models typically feature a credit score range of 300 to 850. Although lenders use these models to make lending decisions, they set their own benchmarks for what scores they’ll accept. Different providers will have different standards, but there are some generalizations that are commonly accepted:
- 720 or more = excellent credit
- 690 – 719 = good credit
- 630 – 689 = fair credit
- Below 629 = poor credit
Credit score models
The most commonly used scoring models in the U.S. are VantageScore 3.0 and FICO 8. In most cases, if your VantageScore is good, then your FICO will also be high as these two work in similar ways. Both the models gather the same data but differ in the way they weigh the information.
What factors influence your credit score?
The two leading credit scoring models, FICO and VantageScore, factor in most of the same data points, but they give different weightage for their calculations. In both models, the two most important factors are:
- Making timely payments on your bills. Credit score calculations are more favourable for those who have a good track record of paying their bills on time. Missing deadlines for payment and not paying bills can have serious consequences on your credit score. A delay of up to 30 days or more beyond the date of payment can show up in your credit history for years.
- How much of your credit you utilize. Credit utilization, or the portion of your credit limits that is being used by you, is just as if not more important than paying on time. As a general rule of thumb, you should avoid using more than 30% of your credit limit. The lower your credit utilization the better it is for you.
How to improve your credit score?
Even if your credit utilization is high, your credit score improves as soon as any improvement in credit utilization is reported. There are a number of things you can do to lower your credit utilization and improve your credit score. The following factors are not considered as important as payment history and credit utilization but they still make a difference:
- Age of credit age: Having a longer credit history is considered to be good for you. The older your account or credit line is, the better it is for your score.
- Assortment of credit: Score calculations favour people for having more than one type of credit — having a home loan and a credit card at the same time, instead of having just 2 credit cards, for example.
- Applying for credit: When you send an application or an enquiry for credit, the process results in a temporary drop in your score. So be careful not to apply for more than one form of credit at the same time.
The data behind the numbers
Credit-reporting agencies, which are also called credit bureaus, gather and store the information from your credit accounts. The three main credit bureaus are TransUnion, Experian, and Equifax. If you’ve ever used any credit products, they have a record of it. This information is used by credit-scoring companies to calculate credit scores. Credit providers buy their reports and scores to evaluate applications.